Aflac Bounces Back as Earnings Growth Returns

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Aflac (NYSE: AFL) fills a niche in the U.S. insurance market, offering benefits for specialized situations that most regular group plans don't cover. Aflac also plays a key role in the Japanese insurance market, where the company gets the bulk of its revenue, and investors have to remember the risks and rewards that having extensive international operations can involve.

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Coming into Thursday's second-quarter financial report, Aflac investors had modest expectations, believing that they could easily see the company's earnings fall for yet another quarter. The insurer defied those fears, however, producing extremely strong earnings growth despite flat revenue performance, and reassuring investors about its future outlook. Let's look more closely at Aflac and what its latest results say about how the company is doing.

Aflac rebounds on strong bottom-line gains

Aflac's second-quarter results reassured nervous investors. Revenue inched downward by a fraction of a percentage point, to $5.43 billion, which was roughly in line with what most of those following the stock had expected. Net earnings soared by 30%, however, and after allowing for non-recurring items, produced adjusted earnings of $1.83 per share. That figure was well above the $1.64 consensus forecast among investors.

Taking a closer look at the report, one of the key things that Aflac has to deal with every quarter is the impact of foreign-exchange fluctuations on its results. The yen weakened in the second quarter of 2017, with an average of 111.10 yen to the dollar versus 108.28 in the year-ago period. That 2.5% weaker figure had the net impact of suppressing some of the local-currency growth of Aflac's Japanese operations, but only by about $0.02 per share.

Aflac Japan also saw some weakness in its operating results. The division saw a 2.7% drop in local-currency premium income, with a nearly 5% decline in net investment income. Higher hedging costs contributed to the pressure on the unit, and total revenue was off 3%.

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Pretax operating earnings were only able to post a 2% rise due, in large part, to the business drop-off, and the rates of decline in dollar terms were even steeper because of the yen's weakness. Strength in the third-sector category, which includes cancer, medical, and income-support products, offset planned weakness in the first-sector category, to which Aflac has sought to reduce its exposure.

In the U.S., Aflac fared slightly better. Premium income rose nearly 2%, with similar gains in investment income and total revenue. Pretax operating earnings jumped 13% from the year-ago quarter, with favorable benefit ratios and better retention rates helping to boost performance.

Can Aflac keep advancing?

CEO Daniel Amos once again communicated the company's views on performance. "We are pleased that our second quarter financial results in both Japan and the United States reflected solid performance," Amos noted, "and advanced our progress toward achieving the company's objectives for 2017." The CEO pointed to achievable growth in key product lines going forward. In particular, Aflac believes that it can produce 4% to 6% growth in sales of third-sector products in Japan, and U.S. annual growth rates in new premium sales of 3% to 5% should be sustainable, as well.

Aflac also repeated its past capital plans and guidance for the year. The insurer still expects to repatriate 120 billion to 140 billion Japanese yen to the U.S. in 2017, and it will use $1.3 billion to $1.5 billion to make stock repurchases. Aflac expects to earn between $6.40 and $6.65 per share in operating earnings in 2017, and its third-quarter figure should land between $1.51 and $1.69 per share. Those figures are roughly in line with what most of those following the stock had expected, although they don't mark a big uptick.

Aflac investors didn't seem surprised or elated with the news, and the stock was down just a fraction of a percentage point in after-hours trading following the announcement. Aflac is doing a good job of handling its fundamental business prospects, and that should pay off for long-term investors going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy.